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Monday, May 05, 2014

Fee Shifting -- The Supreme Court vs. Congress

Fee shifting is one of the most talked-about provisions in pending patent legislation aimed at fixing the patent troll problem. The House passed a bill (HR 3309 - the Innovation Act) in December 2013 that, among other things, implements a "loser pays" system in patent law. In particular, the bill amends the Patent Act to state that a court shall award fees and expenses to a prevailing party in a case in which any party asserts a claim for relief under patent law, unless the court finds that the losing party's position and conduct were justified in law and fact (or else there are special circumstances that make the award of fees unfair). The purpose of this is to allegedly discourage patent trolls from bringing lawsuits, as they are believed to behave badly and take unreasonable litigation positions.

But patent law already has statutory language for fee shifting. Specifically, section 285 of the Patent Act (35 U.S.C. 285), as it currently exists, permits a court to award reasonable attorney fees in "exceptional cases." In an NYT op ed from June 2013, Federal Circuit Chief Judge Randall Rader, along with Professors Colleen Chien and David Hricik, noted that section 285 gives judges the power to award attorney fees to deter patent trolls but that it is rarely done. They then urge judges to make use of this power they have.

It is not entirely clear why judges had not made much use of section 285 , but one reason could be the high standards that the Federal Circuit had imposed. In particular, the court had set the standard for "exceptional cases" to be sanctionable litigation misconduct or a determination that litigation was "brought in subjective bad faith" and "objectively baseless." Further, the Federal Circuit reviewed determinations of "exceptional cases" de novo.

Last week, the Supreme Court overturned both aspects of the Federal Circuit's "exceptional cases" jurisprudence, making it more easy for district court cases to apply section 285. In Octane Fitness v. ICON Health & Fitness, the Supreme Court stated that there is no rigid test for determining "exceptional cases." Instead, section 285 can be satisfied by showing that an infringement case "stands out from others with respect to the substantive strength of a party's litigating position [either law or fact] or the unreasonable manner in which the case was litigated." In Highmark v. Allcare Health Management System, the Supreme Court overruled the Federal Circuit's de novo standard of review, stating that abuse of discretion is the appropriate standard for section 285.

Given the Supreme Court's directive for determining "exceptional cases" under section 285, it would seem that the only difference between existing section 285 and the amended version passed by the House is "may" versus "shall." Of course, the difference between these two tiny words is huge, as are 1) the accompanying provision in the House legislation that would require certification of ability to pay upon non-prevailing and 2) potential joinder of other parties having financial interest in the lawsuit if unable to certify the ability to pay.

In the face of the perceived patent troll problem, both the Supreme Court and Congress have stepped forward to address the issue via fee shifting. The problem is that the approach taken to implement and encourage fee shifting is drastically different. Which answer is better?

Other countries, of course, use mandatory fee shifting in patent cases, as well as other lawsuits. And other people (one example) have discussed how, for example, the British rule works and how a similar system might affect US patent law. But at least the way I see it (and the way some inventors, venture capitalists, and industry organizaitons have told me), the combination of the "mandatory" fee shifting, payment certification, and joinder provision is likely to shut the courthouse doors to parties well beyond the group of bad patent trolls that is driving patent reform today.

Now that the Supreme Court has stepped in to untie the hands of district court judges to award fees in patent cases, it would seem that the best thing for patent reform would be to take a deep breath, step back, and wait to see if section 285 -- as it is currently written and now flexibly interpreted -- provides a tool to curb bad litigation behavior (by trolls or anyone else), before rushing forward with a law that probably goes two steps too far.

Comments

Given your accurate observation that the difference between the rule in Octane Fitness and that in the proposed bill is "huge," why would anyone who does not already oppose the proposed bill agree with your wait-and-see approach? If there is a significant problem to be solved, Octane Fitness is unlikely to solve it.